Lloyds Banking Group is on a collision course with the Independent Commission on Banking (ICB) after it recommended Lloyds should be forced into a mass sell-off of its branches.
The bank said the firm recommendation in the ICB's interim report came out of the blue and that it would battle to quash the proposal. Selling more branches could disrupt its current plan to dispose of 600 sites and their customers, it added.
Lloyds is seeking clarity from the Treasury within weeks so that it can make a clear offer to existing potential bidders and those who might enter the fray with more branches on offer. The ICB will not publish its final proposals until September, but Lloyds said that uncertainty could derail the bank's timetable to find a buyer by the autumn.
The European Union gave Lloyds until 2013 to sell the branches but Antonio Horta-Osorio, Lloyds's chief executive, speeded up the "Project Verde" plan when he arrived at the bank last month.
The Independent Commission on Banking argued yesterday that Project Verde "will have a limited effect on competition unless it is substantially enhanced". In a strongly worded statement, Lloyds said the sale of the branches would create the seventh-biggest British retail bank.
Mr Horta-Osorio said: "We are surprised that the interim report is proposing a potential expansion of Project Verde which we believe is not in the interests of our customers. This option appears to be based on limited evidence and may, paradoxically, delay a new competitor coming into the UK market."
Sir John Vickers, the ICB chairman, refused to put a number on the extra branches Lloyds should sell. The ICB said that the 600 branches would give a buyer 4.6 per cent of the current account market, which would be a small base for a new entrant to challenge the existing banks.
It also argued that the network for sale would have a weak balance sheet with a high ratio of loans to deposits. Raising funds to fill the gap would be tricky and expensive, the ICB said. Adding more branches to the sell-off could boost competition by reducing market concentration and strengthening the buyer as a challenger.
"These competitive pressures should lead to improved prices, products and choice for customers and to greater efficiency and innovation in the long run," the report said.
Lloyds bought HBOS in a rescue takeover in late 2008 in a deal that gave the combined bank about 30 per cent of the current account market. The Labour government waived competition rules at the time to save HBOS from collapse but the ICB yesterday criticised the decision. It stopped short of calling for a complete reversal of the takeover, an option that was open to it.
The report concentrated on the personal current account market and did not make a recommendation on Royal Bank of Scotland's 24 per cent share of the market for small and medium-sized businesses.
The ICB report called for measures to make it easier for customers to switch their current accounts . It did not address the question of "free" current accounts, which the Treasury Committee has argued are unfair and confusing for customers.
The interim report called for the ringfencing of retail banking operations within big, diversified banks to protect savers and taxpayers from investment banking losses. The proposal lacked detail and Sir John admitted that he did not yet know how it world work. But he said the report was "a window on our thinking" before a further round of discussions.